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Led by a low base effect, the combined output of the eight core sector industries rose by a 32-month high pace of 6.8 percent in March, as compared to a year ago. In the previous month of February, output had fallen at the fastest pace in six months, contracting 3.8 percent.
However, despite the return to the growth charts in the end of the year, the cumulative core sector output in FY21 fell to -7 percent. This was due to core sector output contracting in as manay as 8-months of the financial year. Annually, the core sector output had witnessed a marginal 0.4 percent rise in FY20 and a 4.4 percent rise in FY19.
The data released by the commerce and industry ministry on April 30 showed production declined in four out of the eight core sector industries. While cement production rose the highest, rising 32.5 percent, the output of the coal sector witnessed the steepest fall, reducing 21.9 percent.
However, the rise did not impress economists. “Notwithstanding the base effect led-jump in the core sector growth to a 32-month high 6.8 percent in March 2021, the pace of expansion was weaker than our forecast of a 10 percent expansion, with a surprisingly sharp contraction in coal, and milder de-growth in fertilisers, crude oil and petroleum products,” Aditi Nayar, Principal Economist at ICRA, said.
However, the latest infrastructure numbers released by the government seem suggest higher growth going forward, simply due to a construction boom.
The eight core industrial of coal, crude oil, natural gas, refinery products, steel, cement, fertilizer and electricity have a combined weight of over 40 percent in the Index of Industrial production, or IIP.
But cement and steel are considered better indicators of industrial activity as they are vital to a number of industries. Their production moves in line with the demand from industries dependent on them.
In the latest month, cement production shot up by 32.5 percent as compared to a year ago, after contracting by 5.6 percent in February. Meanwhile, production of finished steel also rose by 23 percent, following just a 1.3 percent rise in February.
In the energy space, crude oil production and petroleum refining continued to experience an entrenched slowdown which has now continued for more than 12-months. India’s oil demand had fallen in the initial days of the pandemic due to the nationwide lockdown closing down factories. But the continued contraction has led to experts suggesting the deep lack of demand is symptomatic of sustained slowdown in overall industrial activity.
However, natural gas production suddenly rose by 12.3 percent in March, witnessing an expansion of output in more than a year.
On the other hand, coal production continued to slide due to possibly supply-side issues. Interestingly, electricity output, rose by a substantial 21.2 percent in March, up from just a marginal 0.2 percent in February.
Electricity production is generally tied to coal output given the large share of coal fired thermal manufacturing in India’s electricity generation grid.
Finally, the fertilizer sector, which had beaten the contraction pangs even in the peak of lockdown, also contracted in March, showing a 5 percent reduction in output. The sector had entered a contractionary phase since February.
Given the sharp base effect, ICRA expects the core sector output to expand by 50-70 percent going forward in April.
The core sector data is released about two weeks before the IIP figures, pertaining to overall industrial output are put out. The figures for February will be announced on 12th April.
“Based on the available data, we project the Index of Industrial Production to record a sharp growth of 17.5-25.0 percent in March 2021 (-0.9 percent in January 2021; -3.6 percent in February 2021,” Nayar said.
